Imacs 2016 imecs 2016 Proceedings (Preliminary version) of the 4
CROWDFUNDING AS A CAPITAL SOURCE FOR REAL ESTATE PROJECTS
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- 364.Introduction
- 365.1 Literature review
- 366.2 Research methods
- 367.3 Results and discussion
- 368.Conclusions
- 369.References
CROWDFUNDING AS A CAPITAL SOURCE FOR REAL ESTATE PROJECTS363.Paulína Srovnalíková, Donatas DitkusAbstract This paper aims to present the conception of crowdfunding and its application to real estate projects. Real state crowdfunding is still in its infancy therefore is very important to understand it in order to properly prepare for possible opportunities and threats. Results of the study are obtained through qualitative research methods, such as content analysis, open and axial coding and sentiment analysis of scientific literature also cases of most promising crowdfunding campaigns were studied. Findings of this study provide a deeper understanding of the abilities and limitations of the crowdfunding usage as an alternative capital source for real estate projects. The Authors have summarized that crowdfunding might became significant and attractive way to invest in real estate at the same time providing with capital new real estate projects. Keywords: Crowdfunding, Real Estate, Finance, Investment. JEL Classification: D81, D92, G32. 364.IntroductionThe concept of crowdfunding derives from crowdsourcing, which describes the process of outsourcing tasks to a large, often anonymous number of individuals the “crowd” in the form of open call application to obtain ideas, feedback, assets, resources, knowledge and expertise to develop corporate activities. Some entrepreneurs have relied on the Internet to directly seek financial help from the general public (the “crowd”). This technique, called “crowdfunding”, has made possible to seek capital for project-specific investments. Crowdfunding used web technologies and existing online payment systems to facilitate transactions between sponsors (people who request funds) and funders (people who give money). The crowdfunding process was typically divided into three different phases. The first phase was publication of an entrepreneur’s concrete project idea, including the budget target, the time limit to raise the necessary sum, as well as the compensation for investing in the project. In the second phase, potential funders had the opportunity to gather information on the project, pursue its developments and read comments about the project by other investors. To increase success rates in terms of funding, the initiator could also promote the project through the use of social networks. During a crowdfunding campaign the second phase was often the most critical, as the mobilization of potential funders was essential for the success of a project. The third phase was implementation or payback. In the case of successful funding, the project moved forward and funders received the predetermined rewards at its completion (Lakhani, et. al., 2014). Real estate is the largest asset class worth an estimated $40 trillion only in U.S. market according to December 2015 report0 from the Federal Reserve. The accessibility of property is a critical factor in real estate investment due to the close link between market entry probability, liquidity risk and market transparency (Lieser, Groh, 2014). As crowdfunding is currently working, even if not to its full content, it is now a suitable moment to analyse its chances to succeed and so there arises a need to take a closer look at the phenomenon. We discuss crowdfunding as an alternative way of financing real estate projects. The object of the paper is the real estate crowdfunding. The purpose of the paper is to analyze and describe crowdfunding as a potential capital source for real estate projects. The goals of the paper are: 1. To describe characteristics of real estate crowdfunding; 2. To describe present scope and magnitude of real estate crowdfunding; 3. To analyze prominent real estate crowdfunding platforms. The methods of the study are systematic, logical and comparative analysis of scientific literature and synthesis, open and axial coding techniques and case studies of selected crowdfunding campaigns. 365.1 Literature reviewThe Oxford Dictionary defines crowdfunding as, “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”0 The Internet can greatly decrease the cost of pooling small investments and allowing individuals to target specific opportunities. Crowdfunding is a new internet-based method to raise capital - pool small amounts of money from individuals and a global and promptly emerging novel financing option for businesses, ideas and projects (Belas, et al., 2016; Mura, et. al., 2015; Valanciene, 2013). Different interested parties are willing crowdfunding would be successful and prosper, including governments, seeking to create jobs and foster economic growth (Sigar, 2012; Gobble, 2012; Kitchens & Torrence, 2012; Bounds, 2013). Various legal issues have so far largely restricted equity crowdfunding (Cholakova, Clarysse, 2015). However, there are the good signs in this field. On April 5, 2012, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, dramatically changing the landscape for many companies raising capital. One of the most interesting sections of the Act is Title III, the CROWDFUND Act, which enables entrepreneurs and small business owners to sell limited amounts of equity in their companies to a large number of investors via social networks and various Internet platforms. Prior to the CROWDFUND Act, selling equity interests in companies via crowdfunding was for all practical purposes illegal under United States securities laws. The Act attempts to exempt crowdfunding from expensive registration requirements and allow crowdfunding websites to avoid the classification of broker, which would impose substantial registration costs on such sites. Through the CROWDFUND Act, equity-based crowdfunding has the potential to open funding opportunities to countless underfunded entrepreneurs and businesses. In addition, it can provide investors with new ways to diversify their portfolios (Stemler, 2013). The great number of studies carried out shows that there were no certain answers formed about decisions choosing finance alternatives in real estate industry, very often the option for a form of financing real estate projects is influenced only by the “level of accessibility” of the resources available on the financial market and the financing policy of many companies is guided rather by the constraints of the financial market than a coherent company’s strategy (Skačkauskienė, et. al., 2015). Communications technologies enable sponsors and other entrepreneurs from anywhere to access capital globally (Agrawal, et. al., 2015). Real estate crowdfunding provides an open access to direct real estate investments for general public. The popular perception in the crowdfunding community has been that reward-based platforms are more likely to attract individuals who invest because they “like” and “enjoy” a project or an initiative and want to “support” it (Schwienbacher, Larralde, 2010), whereas equity-based platforms are seen as attracting people who are largely interested in backing projects for a return on their investment. However, the bundling of financial and nonfinancial incentives in crowdfunding campaigns can be an effective new strategy for raising finance on the platforms (Cholakova, Clarysse, 2015). Sources of financing can broadly be divided into two main categories: equity and debt. When money is invested against equity, it goes directly into the capital of the company for which investors receive shares. As a consequence, they obtain some control over the company, while at the same time bearing risk. On the other hand, those who give finance for debt (mainly bank loans) remain external parties, linked to the company by a detailed contractual agreement. They bear lower risk thanks to collateral and seniority of their claims over equity (Virglerová, et. al., 2016; Šúbertová, 2014; Schwienbacher, Larralde, 2010). Equity/investment type is the collective effort of individuals who network and pool their money, usually via Internet to investing for equity, or profit/revenue sharing in businesses or projects. Contributors are rewarded an equity stake in a company in return for their investment. The value preposition being offered is ownership or voting rights (Gulati, 2014). This embodiment provides range of solutions to assist projects in early stage of development. Project initiators and their partner platforms define o time period and a target amount of money which serves as a threshold (Hemer, 2011). Money target is divided into equal slices which are offered via the platform as equity shares (or stocks) to the crowd at fixed prices. Collecting money lasts until the threshold is reached and then investment phase begins (Pazowski, Czudec, 2014). Lending-based crowdfunding enables the direct borrowing of funds, bypassing the traditional financial institutions, such as banks. This type of crowdfunding is largely an evolution of the peer-to-peer model of lending. Two approaches can be distinguished: microfinance (P2P microfinance) and social lending (P2P lending). Payment plus interest might be returned in a lump sum or along some sort of payment schedule. Social lending relate to higher amounts making it the second largest category of world crowdfunding market, as measured by the money raised. Crowd lending is considered a threat to the big lending businesses as global banks (Pazowski, Czudec, 2014). Knowing that real estate investment is related to the general economic activity and prosperity of a region or country there is a must to properly investigate new sources of capital for real estate investments.
Each investment that is listed generally contains the information one would expect in an institutional investment committee memo. The memo and other attachments discuss: the location, the market, historical financials, underwriting assumptions, sponsor track record, risks and exit strategy. For some deals, the crowdfunding sites hold webinars or conference calls to introduce the sponsor and the deal to investors who are registered on the Web site and are interested in the property. Some projects are of good underlying quality while others are not: thus investors face asymmetric information about the identity of projects. Some investors have informative but imperfect signals of project quality while others do not, but everyone invests limited funds in one of several competing projects. Prodigy Network is one of the largest Crowd-investing platforms in the world with projects around the globe worth over $850 million and $300 million in equity. Prodigy Network’s crowd-investing model was developed as an innovative way to give smaller investors access to large real estate assets. Prodigy Network and its affiliates have led six international and U.S.-based projects, raised more than $300 million from 6,200 investors around the world, and are currently developing projects globally with a projected value of more than $850 million. The major banks like Deutsche Bank, CIBC and Bank of America have provided traditional mortgage financing for Prodigy’s Manhattan projects0. Prodigy had been vertically integrated until now. Rodrigo Nino, founder and CEO of the company said: ”I wanted to control the process from A to Z before opening up to third party developers. Now, with six projects worth an estimated 850 million dollars and over six thousand investors contributing more than 275 million dollars, we will open our platform to other developers in order to create a true exchange. We will focus on curating and underwriting projects that meet our criteria and we will work only with proven developers and operators. In due time, we will look back and see that the change was bigger than anything we may have tried to anticipate today. Crowdfunding will level up the playing field in real estate forever,” he predicted (Lakhani, et. al., 2014). RealtyMogul.com is a marketplace allowing accredited investors to pool money online for crowdfunding real estate investment opportunities. Realty Mogul arose in 2012, though it did not launch at www.RealtyMogul.com until 2013. Their mission then was the same as it remains: to simplify investing in real estate by connecting real estate investors and entrepreneurs via cutting-edge technology. Fast forward to four years later and you will see that Realty Mogul has transformed into a leader in the real estate capital online marketplaces. They provide both commercial debt and commercial equity products throughout the United States, educate their interested investors, and consolidate the company which they genuinely believe will alter the way that real estate is financed and invested in for all time0. RealtyMogul.com has raised $9 million in Series A and $35 million in Series B funding0. Fundrise is an American real estate crowdfunding platform. It facilitates transactions from individuals, allowing them to invest in real estate projects with initial investments. Fundrise created a transparent online marketplace to revolutionize commercial real estate investing, and is trying bridge the gap from small real estate deals to the larger commercial real estate deals. Fundrise charges investors 0.3% to 0.5% of invested capital annually to service and asset management of the investments0.
CoAssets is southeast Asia’s first real estate crowdfunding site. CoAssets Platform is a business networking and educational platform for real estate and crowdfunding enthusiasts. This crowdfunding site from Singapore, that lists properties from around the world, has raised US$733,000 in series A funding from undisclosed investors. This values the company, believed to be the first real estate crowdfunding platform in Southeast Asia, at S$13 million, or about US$9.53 million post-money0. Mayfair and Morgan is Europe’s first international real estate crowfunding platform. International property management and investment firm Mayfair & Morgan has launched a investment crowdfunding platform that allows its members to invest in residential property from £1,000 and up. The company wants to allow investors to generate long-term returns without the need for house hunting, mortgage acquisition, tenant recruitment and property management0. The process of crowdfunding very much depends on the way each intermediary perceives and organizes it. There appear significant differences in the application and project selection process – it can be done by just filling a form on the internet, include meeting with consultants or involving an exhaustive background check. The background check is very important in real estate crowdfunding. Many real estate crowdfunding platforms allow only experienced sponsors to list their properties for potential investments. A need to present a project or an idea for broad public is a feature of crowdfunding and the key findings of the study reveal that crowdfunding has a marketing benefit that translates into sales (Valanciene, Jegeleviciete 2014). Thus, there appears a possibility for the broad public, including backers or investors, to express their opinions and suggestions, so the product, project might be modified and perfected with their help also local communities could provide necessary support for legal approval. But developers should be cautious about time of project publication because it can also be harmful for the real estate project.
Research shows that real estate crowdfunding may become a significant source of capital for many real estate developers. The identification of worthwhile investments and monitoring recipients of funds may be a key challenge for crowdfunding. It will be interesting to see how crowdfunding evolves over the next years. Considering future research, the phenomenon of crowdfunding could also be studied through theories of motivation to get better understanding what drives individuals to invest in real estate projects via crowfunding platforms. 369.ReferencesAgrawal A., Catalini, C., Goldfarb, A., (2015). Crowdfunding: Geography, Social Networks, and the Timing of Investment Decisions. Journal of Economics & Management Strategy, vol. 24(2), pp. 253-274. Belás, J., Vojtovič, S., Ključnikov, A. (2016). Microenterprises and Significant Risk Factors in Loan Process. Economics and Sociology, Vol. 9, No 1, pp. 11-27. Bounds, A. (2013). Funding Options: Alternative Financials Fill Gap Left by the banks. [2016-01-15] Available at: Cholakova M., Clarysse B. (2015). Does the Possibility to Make Equity Investments in Crowdfunding Projects Crowd Out Reward-Based Investments? Entrepreneurship Theory and Practice, 1042-2587. Gobble, M. A. M. (2012). Everyone is a venture capitalist: the new age of crowdfunding. Research technology management. Vol. 4, pp. 4-7. Kitchens, R., Torrence, P. D. (2012). The JOBS Act – crowdfunding and beyond, Economic Development Journal. Vol. 4, pp. 42-47. Lakhani K., Hutter K., Friar G. (2014). Prodigy Network: Democratizing Real Estate Design and Financing. Harvard Business School, 9-614-064. Lieser K., Groh A.P. (2014). The Determinants of International Commercial Real Estate Investment. The Journal of Real Estate Finance and Economics. Vol. 48, pp. 611–659. Mura, L., Buleca, J., Hajduová, Z., Andrejkovič, M. (2015). Quantitative Financial Analysis of Small and Medium Food Enterprises in a Developing Country. Transformation in Business & Economics, Vol. 14, No 13(4), pp. 212-224. Pazowski, P., Czudec, W. (2014). Economic Prospects and Conditions of Crowdfunding. Human Capital without Borders: Management, Knowledge amd Learning for Quality Life, International Conference –Slovenia. Schwienbacher A., Larralde, B. (2010). Crowdfunding of Small Entrepreneurial Ventures. Handbook of Entrepreneurial Finance. Oxford University Press. Sigar, K. (2012). Fret no more: inapplicability of crowdfunding concerns in the internet age and the JOBS Act’s safeguards. Administrative Law Review. Vol. 2, pp. 474-505. Skačkauskienė, I., Vilk, N., Vojtovic, S. (2015). A Model for Measuring Customer Loyalty Towards a Service Provider. Journal of Business Economics and Management. Vol. 16, No 6, pp. 1085 – 1100. Stemler A.R. (2013). The JOBS Act and crowdfunding: Harnessing the power and money of the masses. Business Horizons. Vol. 5(6), pp. 271—275. Šúbertová, E. (2015). Characteristics and types of financial resources to support the development of small and medium – sized enterprises in Slovakia, Financial management of firms and financial institutions. International scientific conference [online], Ostrava: Technical university of Ostrava. Available at: http://wis.vsb.cz/ekf/uloziste/2015-frpfi-sbornik/Part_IV_web.pdf Valanciene L., Jegeleviciete E. (2014). Crowdfunding for creating value: stakeholder approach. Procedia - Social and Behavioral Sciences. Vol. 15(6), pp. 599 – 604. Virglerová, Z., Kozubíková, L., Vojtovič, S. (2016). Influence of selected factors on financial risk management in SMEs in the Czech Republic. Montenegrin Journal of Economics. Vol. 12, No 1, pp. 21-36.
Paulína Srovnalíková, Ing. MBA, Department of Management and Human Resources Development University of Alexander Dubcek in Trencin, Študentská 3, 911 50 Trenčín Slovakia paulina.srovnalikova@tnuni.sk Donatas Ditkus, Research Scholar, School of Economics and Business, Department of Economics. Kaunas University of Technology, Gedimino str. 50-501, LT- 44239 Kaunas, Lithuania donatas.ditkus@ktu.edu
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